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RBNZ holds OCR at 2.5% and repeats “middle of 2010” outlook for first hike

RBNZ holds OCR at 2.5% and repeats “middle of 2010” outlook for first hike

By Bernard Hickey in Wellington Watch Bernard Hickey deliver a report on YouTube here Watch RBNZ Governor Dr Alan Bollard talk about the economy, interest rates and the housing market. The Reserve Bank has left the Official Cash Rate (OCR) on hold at 2.5% and has repeated that it won’t be increasing the OCR until the “middle of 2010”. The Reserve Bank is scheduled to make OCR announcements on June 10 and July 29. The OCR has been on hold since April 30 last year. Governor Alan Bollard said the economy was recovering broadly as expected and growth was expected to pick-up further through 2010. However, consumer spending and business investment was more subdued than in previous recoveries as indebted households and corporate increased saving and reduced debt, he said. Some concern about decisions on property taxation in the May 20 budget budget also appeared to have slowed activity in the market for existing homes, the Reserve Bank said. It forecast stagnant real house prices over the next couple of years. The Reserve Bank also pointed in its Monetary Policy Statement to likely one-off increases in prices later this year to come from increases in ACC levies and the Emissions Trading Scheme (ETS). It did not refer to an expected GST increase to 15% from 12.5%, but said it would “look through” the impact of the ETS as long as it did not change inflation expectations. Here is the rest of the Governor’s statement below.

“Trading partner activity has recovered a little faster than expected. Currently growth is strongest in China, Australia and emerging Asia, but is much more muted in other trading partners. At the same time, risks around the global outlook have increased, although not to the extreme levels seen at the height of the crisis. “We estimate the New Zealand economy grew at a stronger pace in the December and March quarter than in the prior two quarters. Looking forward, while growth is expected to increase to about 4% next year, this is subdued relative to previous recoveries. “Policy stimulus and improved confidence have seen a pick-up in household spending. That said, households are still cautious with house sales and credit growth remaining subdued. Business spending is weak despite much improved confidence. “Annual CPI inflation is currently at 2%, and is expected to track within the target range over the medium term. In the short term, implementation of the amended Emissions Trading Scheme and increases in ACC charges will push CPI inflation toward the top of the target range. “Higher bank funding costs have reduced the level of stimulus that would normally be associated with any given level of the OCR. We expect these costs to persist over the projection (period), reducing the extent of future increases in the OCR. Fiscal consolidation would also help reduce the work that monetary policy might otherwise need to do. “We continue to expect to begin removing policy stimulus around the middle of 2010.”
My view Inflation could hit 5% by the end of the year, well outside the Reserve Bank’s target range of 1-3%, but it has decided to remain sitting on its hands. That’s fair enough, given many of these increases are ‘one offs’, but it’s clear now that savings will be eroded and some people will be made poorer by inflation – an issue most people haven’t worried about for a long time. The Reserve Bank’s March quarter Monetary Policy Statement has done an excellent job of forecasting the outlook for prices and the economy. It shows the Emissions Trading Scheme (ETS) is likely to increase prices by around 0.4% and new big ACC levies are likely to increase prices by 0.2%. At the same time the New Zealand dollar’s fall in recent months and an increase in export prices and petrol are driving prices higher. The expected increase in the GST rate to 15% to 12.5% will be the coup de grace for the inflationary outlook. Added to the current ‘natural inflation of just over 2%, it’s quite likely the headline inflation rate will be over 5% by the end of 2010. How do New Zealand consumers feel about that? How will it change their expectations about future inflation? The Reserve Bank will be watching that closely, but it’s likely to use its ‘get out of jail’ cards in the Policy Targets Agreement so that it can ‘look through’ these one-off increases. Inflation is a quietly rapacious beast. It erodes the value of savings and changes the way households behave. They’re much keener to spend than to save, and more importantly, are much keener to borrow than to save. This has been the legacy of two decades of high inflation in the 1970s and 1980s. It eventually bloomed in the property boom of the 2000s when savers decided property was the ultimate hedge against inflation. The government is about to boost inflation a little and hope to get away with it. It may well do in an era of what is likely to be low inflation globally. But if there is another financial crisis or a commodity price boom we risk embedding these inflationary expectations all over again. It’s something the government should think about before it whacks up GST. Your view: Welcome your view in the comments below Watch on our homepage here click here to go to todays 90-at-Nine video report

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